More than £1bn was yesterday wiped off the share price of BAE, Britain's biggest arms company, after it was forced to announce that the US department of justice has opened a criminal inquiry into allegedly corrupt deals with Saudi Arabia.

Prosecutors in Washington are understood to have served subpoenas on BAE demanding disclosure of the files on the £40bn Al Yamamah programme. The company, which issued a terse statement confirming the Saudi investigation, refused to comment further.

Both Lord Goldsmith, the outgoing attorney-general, and the head of the Serious Fraud Office, Robert Wardle, will face questioning from a commons committee today. MPs said they would demand to know whether the government, which claimed "national security" was at stake when it shut down an SFO investigation into the Saudi deal, will now refuse cooperation with the US.

The DoJ announcement, predicted a fortnight ago by the Guardian, knocked 8% off BAE's closing share price, and left the Ministry of Defence silent as to whether it would hand over key documents on the government-to-government deal.

The DoJ is said to have been weighing an investigation in the wake of the Guardian's revelations, and the final decision was swayed by the size of the payments involved and the scale of the business dealings involving BAE.

Lawyers familiar with the department of justice's operation say an investigation into BAE's dealing could be long and arduous, assuming political considerations do not derail the probe before its completion.

A three-year British Serious Fraud Office inquiry which found £1bn had been paid to Washington accounts controlled by Prince Bandar of Saudi Arabia was suppressed last December, after intervention by the attorney-general and Tony Blair. The SFO had found classified MoD files revealing government complicity in the transactions.

The prime minister claimed that to go ahead with the inquiry would wreck relations with the Saudi royal family, and would endanger the lives of British citizens and soldiers if the Saudis cut off terrorist intelligence. BAE also claimed it was in danger of losing a lucrative new Saudi contract, to sell 72 Typhoon war planes.

Prince Bandar, now the Saudi king's national security adviser, says the payments, which included the purchase by BAE of a brand-new £75m Airbus for his use, were legitimate official transactions exclusively for the use of the Saudi ministry of defence. He says the Guardian disclosures after the closing-down of the SFO inquiry were "the zenith of fabrication".

Andrew Tyrie, a Tory member of the constitutional affairs committee, said he would ask Lord Goldsmith today if Britain would cooperate with the US. "The decision to end the SFO inquiry was inexplicable at best and deeply reprehrensible at worst. It would be deeply embarrassing if there were to be serious criminal offences here when the government stopped the SFO from investigating." The Lib Dem leader, Sir Menzies Campbell, yesterday also called on the incoming prime minster to "raise, not compromise, ethical standards in business and diplomacy".

The DofJ investigation under the 1977 foreign corrupt practices act will include the Saudi deals, BAE said yesterday, leaving open the possibility that Washington will also look at others of the many arms deals for which BAE is under investigation.

Swiss federal prosecutors are conducting a money-laundering inquiry into payments made through Swiss banks and offshore companies. Swedish prosecutors are investigating BAE deals involving Anglo-Swedish Gripen aircraft sales in the Czech Republic. Austrian prosecutors are probing related deals, and so is a Hungarian parliamentary commission.

The Washington inquiry is by far the most serious faced by BAE. The company, which is currently bidding £2bn for Armor Holdings in the US, sees the Pentagon as its biggest customer and expects 42% of its turnover to be in the US next year.

The US administration's committee on foreign investment, which vets takeovers on security grounds, has just waved through the Armor Holdings bid.